Whitepaper: Internal Controls – Cash & Checking Accounts

Cash is vitally important to every business, and it is also the easiest asset to steal. We all hope our co-workers and employees are honest, and they probably are. While your employees may be honest, poor cash controls create temptation and opportunity.

The goal of internal cash controls is to prevent fraud and theft before it happens. The proper controls involve accurate and timely cash records, separation of duties, regular oversight and proper physical handling of cash.

Proper cash procedures should be documented and kept current and up to date. This sends an important message to your staff about the due diligence of owners and managers.

Accurate and Timely Cash Records

It is imperative that there is clear and accurate recording of all cash that is received and of all cash disbursements. Make sure all cash transactions are documented and recorded immediately. A delay in recording cash transactions not only introduces an opportunity for errors, but also creates the opportunity for temptation that could lead to cash fraud.

Separation of Duties

Proper separation of duties is also an important tool that discourages unethical cash practices. The idea behind separation of duties is that it is much less likely for two employees to collude to commit fraud than it is for one employee to act alone.

Common procedures for separation of duties include:

– Bank statements are received sealed and opened by someone other than the person responsible for cash deposits and disbursements. Copies of the checks included should be reviewed for fraudulent payees or forged signatures.

– Bank reconciliations are performed by someone who does not prepare the cash deposits and disbursements.

Separation of Duties (continued)

– Invoices are reviewed and approved by an owner/manager before the disbursements are made. The owner/manager may also sign the checks prepared by a bookkeeper.

– Requirement that two people be present any time a large amount of cash is being handled or transported. For example, you may require two signatures on all checks over a certain dollar value.

In a small business, separation of duties often presents difficulties due to the limited number of employees. However, even small businesses with few employees may be able to assign responsibilities to achieve adequate separation. If this is not possible, direct oversight by the owner/manager can usually provide the necessary control. For example, in the area of cash, the owner/manager might compensate for a lack of separation of duties by being the only authorized check signer, by receiving bank statements directly, and by reviewing all bank statements and reconciliations.

Oversight

Management or owner involvement in reconciliation and regular internal audits sends a signal to all members of the organization who handle cash that internal cash control is a priority. Depending on your organization, there may be reconciliations that need to occur at several levels. These can include cash drawer reconciliations at the end of a shift or the business day, reconciliation prior to a bank deposit, and regular bank statement reconciliations.

Proper Physical Control

Physical control over cash means how the cash is literally stored and handled. The obvious rule of thumb is that the less cash on the premises then the less chance for theft or embezzlement. Make bank deposits as often as necessary. Keep the cash you have on hand in a safe if possible; or at least securely locked.

A restriction on the number of people who have access to cash is also an important method to prevent cash fraud and abuse. It creates a high level of accountability, which in turn reduces temptation and your cash risks.

Proper cash controls reduce temptation and opportunity – the keys to prevention. Our services cannot be relied upon to disclose errors, fraud, or illegal acts that may exist. However, we will report to you any evidence or information that comes to our attention regarding material errors or illegal acts that may have occurred. We have no responsibility to identify and communicate deficiencies in your internal cash controls. Please let us know if you have any questions or if we can be of assistance with the design and implementation of your internal cash controls.